This year, the Panama Canal has been troubled by the lack of rainfall and severe drought, with recorded precipitation for October being the lowest on record since 1950. Water levels in Gatun Lake have continued to decline, and in response to this, the ACP has been reducing daily ship crossings through the canal. Booking slots were reduced to 25 from Nov 3, and this would be reduced further to 18 slots from Feb 1.
With the Canal a key maritime shipping route for global trade, including commodities, the effect of the announcement was particularly notable in the LPG market as traders digested the news. Supply was going to be tight, and logistical concerns were mounting. With the US being a major exporter of LPG to Asia, the market responded in volatile manner as arbs widened and FEI (the Asia LPG benchmark) structure roofed.
There were consequences in price action of the various curves. The C3 East/West (FEI vs NWE) reached all-time highs in the prompt, surpassing $200/mt. Meanwhile, the FEI/MOPJ surpassed $100/mt at its highs, triggering sell-side flows at these elevated levels which unwittingly supported MOPJ structure. The LST/FEI arb continued to find new depths, falling below -$400/mt in the December contract.
For a moment, prices looked like they were going to correct lower as existing length suddenly found themselves in a good position to take profit. However, once news came out that Japan’s Eneos paid $4 million to skip queues at the Panama Canal, the market realised that the situation was serious and thereby aggressively bid up FEI structure, where the Dec East/West hit new highs of $240/mt (Figure 1).
Figure 1: Price action of Dec’23 C3 East/West. Source: Flux
With the Panama Canal news being priced in, the LPG market was about to embark on a regime shift. Or was it? One month onwards, looking at price action, it is as if the news never came out as prices retreated to pre-headline levels.
Over the past two weeks, FEI structure has rapidly corrected downwards. The now-prompt Jan/Feb spread has come off from $37/mt highs to $12/mt (Figure 2). What’s more, the LST/FEI arb has comfortably surpassed pre-Panama Canal news levels on seemingly no underlying reason and despite cargoes getting cancelled. Market participants are bemused, especially as the current trend is against preconceived fundamentals.
Figure 2: Price action of Jan/Feb FEI. Source: Flux
Take C3 LST for instance, the US propane benchmark. Despite stocks sitting comfortably above the 5-year average (Figure 3), bullish sentiment prevailed in the Dec/Jan LST spread which traded from -1c/gal to above 1c/gal (Figure 4). This was on the back of significant financial flows, as funds rolled their existing shorts from December into January (Figure 5), which likely triggered short covering flows that exacerbated the move higher.
Figure 3: US propane/propylene stocks. Source: EIA
Figure 4: Price action for Dec/Jan LST. Source: Flux
Figure 5: Counterparty Type Positioning for Dec’23 LST. Source: Flux
FEI fundamentals had been weakening given weaker physical demand and selling interest during physical windows. This was amidst low PDH margins which caused crackers’ operating rates to drop below 80%, prompting PDH units to re-sell FEI in the market.
Furthermore, higher Gatun Lake water levels weakening freight rates (Figure 6) provided relief to supply tightness concerns. Combined with poor Asia demand, the availability of alternative routes including the Suez Canal and the Cape of Good Hope also weighed on sentiment.
Figure 6: Price action of M1 BLPG freight.
With trade houses continuing to bid the LST/FEI arb and a major selling FEI spreads and flat price in January, there is strong bullish momentum in the LST/FEI arb, with price action closely tracking the upper Bollinger Band whilst the RSI indicator sits in overbought territory.
Figure 7: Price action of Q1 LST/FEI. Source: Flux
However, the fact remains that there is excess supply in the US, with the Panama Canal restrictions continuing to be a major driver for the LPG market in the coming months. If local US demand remain weak due to above-average temperatures, while we see an uptick in Asian demand, this could reignite the bearish trend in LST/FEI once again. Panama Canal restrictions are only intensifying until February, and the market could be in for an extremely volatile festive period.
